Global plan needed to end corporate tax haven holidays

The more elusive the tax liabilities of global companies, the more aggressive many of them have become in their practices. Global cooperation on corporate regulations is the only way to solve the problem, writes Mike Steketee.

If I said Barbados, Bermuda and the British Virgin Islands were powerhouses of the world economy, you might be a little sceptical.

So here are the figures: in 2010, these three countries together received more foreign direct investment than Germany or Japan, according to the International Monetary Fund. Moreover, these tropical idylls were also big investors overseas. Each was amongst the top five countries making investments in Russia in 2010. The British Virgin Islands alone were the second largest investor in China after Hong Kong and 3.5 times bigger than the US.

Yes, tax or the lack of it has everything to do with it. The international management consultancy Oliver Wyman estimated in 2008 that the assets deposited in tax havens around the world totalled $10 trillion. That is seven times the current size of the Australian economy. A report released this week by the Uniting Church's Justice and International Mission says 61 of the Australian Stock Exchange's list of 100 publicly traded companies have subsidiaries in tax havens that explicitly offer secrecy for non-residents.

According to expert evidence before a US Senate subcommittee last week, $22 billion or 64 per cent of Apple's pre-tax income was recorded in Ireland in 2011, saving $7.7 billion in US taxes. The overall effective tax rate on Apple's foreign earnings was 2.5 per cent, the subcommittee heard. In Australia, Labor MP Ed Husic told parliament Apple Australia paid $40 million in tax on $6 billion in revenue it generated last year. That did not stop it charging Australian customers much higher prices than in the US.

Google says its annual income tax bill in Australia was $781,471, refuting a report that it was 10 times lower. Compared to estimates of annual advertising revenue from Australia of between $1 billion and $2 billion, it still is not much. Google makes use of the lyrically named Double Irish Dutch Sandwich. Although they may not be aware of it, Australians have been buying their Google ads from a subsidiary in Ireland, which has a company tax rate of 12.5 per cent, compared to Australia's 30 per cent. The Irish subsidiary pays a royalty to a Dutch subsidiary, thus reducing its already low Irish tax liability. The Dutch subsidiary passes the money on to another subsidiary controlled in Bermuda, which has no company tax. The Dutch do not charge withholding tax on the transactions for which Google would be liable in other countries.

It is not just technology companies that are using such exotic merry-go-rounds. According to evidence to the UK Parliament's Public Accounts Committee, Starbucks paid no taxes in Britain for three years, despite sales totalling 1.2 billion pounds. Most people think Starbucks makes money from its coffee but it attributes most of its profits to its intellectual property in the form of its brand name.

There is nothing illegal about any of these activities, according to the best advice these companies have obtained. And therein lies the problem.

Corporate tax avoidance has been with us at least since companies started operating across borders 400 or so years ago. In the 1920s, government concerns about its growing scale led to measures to address it. But they seldom have been able to keep up with the changing nature of global business, let alone the ingenuity of tax lawyers and accountants.

The more elusive the tax liabilities of global companies, the more aggressive many of them have become in their practices. Tax authorities generally can determine the true value of transactions when they involve goods and commodities produced in a particular country. It is much harder to do so when the assets are intangible, such as software, patents, copyright or the Starbucks' brand. Their home can be anywhere and so can the profits attributed to them.

Against the might of multinationals, governments often look puny. Assistant Treasurer David Bradbury assured us this week that "the Gillard Government is committed to ensuring that large multinational companies pay their fair share of tax so that families, pensioners and small businesses do not have to take on a higher burden of taxation in the future". The action to accompany the words came in the form of legislation requiring the Australian Taxation Office to publish how much tax is paid by companies with an annual income of $100 million or more. "Improving the transparency around the tax payable by large corporate entities will help to inform the debate and discourage aggressive tax minimisation practices," says Bradbury. Good luck with that.

The Government has taken other measures, including strengthening catch-all anti-tax avoidance provisions, tightening rules to stop companies loading up their Australian operations with debt to avoid tax and negotiating a tax treaty with Switzerland to overcome its secrecy provisions.

According to Rick Krever, director of Monash University's Taxation Law and Policy Research Institute, these measures address the symptoms rather than the real problem. "They are tinkering around the edges," he tells The Drum. "Until governments start cooperating in the same way corporations do across borders, making decisions across the entire world, we will always be behind."

Governments everywhere are facing the pressure of slowing revenues, increasing the will to act. In July, the OECD will present a draft action plan on profit shifting and the eroding tax base to G20 finance ministers. But they are starting from a long way behind. And Barbados, Bermuda and the British Virgin Islands are not in the G20.

Mike Steketee is a freelance journalist. He was formerly a columnist and national affairs editor for The Australian. View his full profile here.

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